In Stockholm, Sweden on Monday the Royal Swedish Academy of Sciences announced that Americans Eugene F. Fama, Lars Peter Hansen and Robert J. Shiller have been awarded the 2013 Nobel Prize in Economics “for their empirical analysis of asset prices,” now used to make long-term predictions of stock and bond market changes.
While short-term fluctuations in the stock market are difficult to ascertain, these three professors of finance and economics each devised a piece in the puzzle in the overall statistical understanding of how stocks, bonds and other assets change over time.
In the 1960s Fama discovered the impact that new information has on stocks in the short term, finding that changed data can have an almost immediate effect on pricing.
In the 1980s Shiller discovered that for stocks, bonds, and other assets, the ratio of prices to dividends decreases when stock pricing is high and rises when stock prices are low, making it possible to better predict stock pricing over the long term more accurately than over the short term.
Using the discovered trends of stock pricing by the previous two, Hansen used statistical modeling along with the theory that the higher ratio dividend prices to lower stock prices is due to rewarding greater risk during riskier times to better predict asset pricing.
Eugene Fama is the Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago in Illinois.
Lars Peter Hansen is the David Rockefeller Distinguished Service Professor in Economics & Statistics at the University of Chicago in Illinois.
Robert J. Shiller is a Sterling Professor of Economics at Yale University in New Haven, Conn.
All of the prizes, except for the peace prize, will be awarded on Dec. 10, 2013 in Stockholm. The peace prize will be awarded on Dec. 10, 2013 in Oslo, Norway.
For information on all of the other 2013 Nobel Prize awards, please see 2013 Nobel Prize in Physiology or Medicine, 2013 Nobel Prize in Physics, 2013 Nobel Prize in Chemistry, 2013 Nobel Prize in Literature, and 2013 Nobel Peace Prize.
"The Prize in Economic Sciences 2013 - Press Release." Nobelprize.org. Nobel Media AB 2013. Web. 14 Oct 2013. http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2013/press.html